Unlock the Publisher’s Digest for free
Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
Brussels has agreed rules that will force derivatives traders to funnel some of their trades through accounts at clearing houses in the bloc, in a plan to wrest a share of the vast market from the City of London.
The revised rules, agreed on Wednesday, will force EU-based banks trading quantities of contracts deemed “systemic” by regulators to send a minimum amount of business to an EU clearing house.
The controversial move, which banks, asset managers, pension funds and brokers across Europe have opposed, is part of Brussels’ efforts to reduce its dependence on the UK’s post-Brexit financial services market and strengthen its capital markets. capital.
Clearinghouses are key to avoiding market instability, sitting between counterparties in trades and preventing defaults from cascading through the financial system.
More than 90% of the world’s euro derivatives business is handled by London’s LCH, but EU politicians are unhappy that much of the activity is outside the bloc’s direct control.
“This will bring more clearing services to Europe and improve our strategic autonomy,” said Vincent van Peteghem, finance minister of Belgium, which currently holds the presidency of the Council of the European Union.
“It will also help stabilize the market and ensure its efficient functioning, which is a prerequisite for a true capital markets union,” he said.
The Council of the European Union said EU traders above a certain threshold will be required to place some derivatives through so-called active accounts at EU clearing houses.
The rules would also give greater powers to the European Securities and Markets Authority, the EU’s markets regulator, to coordinate activity and information sharing between EU clearing houses in the event of an emergency.
The London Stock Exchange Group, which controls LCH, estimates that less than 10% of its euro derivatives assets, which currently stand at 143 trillion euros, come from the EU.
While the move will likely benefit EU-based clearinghouses run by companies such as Deutsche Börse and Nasdaq, critics have warned that it will likely significantly increase costs for EU banks and investors.
The business has remained in London post-Brexit because banks find the cost of splitting and moving parts of their derivatives positions prohibitive.
“The EU forces banks to split accounts and they lose economies of scale,” said Karel Lannoo, chief executive of the Brussels-based think tank CEPS.
“EU banks will have no choice, they will have to carry out part of their operations within the EU [clearing houses] but due to the fact that they will have to split their accounts between the EU and the UK [clearing houses] their costs will increase relative to competitors who will not,” he said.
The move comes before the expiry of a temporary permit allowing European banks and fund managers to use UK clearing houses until June 2025.